Weathering the Storm

The economy in the Pacific Northwest cooled in the past two years. However, the temperature of retail remains warm, in part because of the region's robust mix of established industries and powerful new technology start-ups.

The net effect is that older, boring and under-stored community and neighborhood malls and a few regional malls are being rehabilitated, repositioned or replaced by more traffic-building attractions.

People still flock to Washington and Oregon. Population growth slipped from 1.9% in 1998 to an expected 1.3% this year. That's still about double the national average, according to the Seattle office of Marcus & Millichap Real Estate Investment Brokerage Co.

The region's population is increasingly one of skilled workers with high-paying jobs in thriving computer hardware/software, semiconductor chip and other technology enterprises, along with swarms of dot.coms. Nonetheless, regional employment growth this year is forecast at 2.1%, roughly half of what it was in 1998, Marcus & Millichap says.

The two states - which is to say the burgeoning metropolitan Seattle-Puget Sound and Portland areas - are inviting markets for the retail/shopping center industry. But developing in this often-overcast region is no cakewalk. There are man-made clouds that can be just as dispiriting as Mother Nature's.

Mark Fitkin, managing director of CB Richard Ellis' Portland office, explains that urban development is confined within a land-use ring drawn around Portland.

"Very little undeveloped land zoned for retail development remains in Portland, which has led to redevelopment, for the most part," Fitkin says. "Seattle's land-use rules are less restrictive, so there is more new development, although it is difficult to find sites there within densely populated neighborhoods compared to the San Francisco Bay area, Phoenix or Las Vegas."

He continues: "We won't see the peaks and valleys of the late 1980s and early 1990s, but rather steady, above-average growth."

Robert Dunn, a CB Richard Ellis vice president and retail specialist in the company's Portland office, notes, "I'm not aware of a 20-, 30-, or 40-acre site available for retail that is not already in play or even under construction. We will need several thousand acres released over the next five to 10 years, or we'll be stuck mainly with rehabs."

Some developers see this scarcity of land in a negative light, "but retailers in this market could see this scarcity as positive because it helps keep the competition out," explains Bryan Sampsel, senior analyst with Norris, Beggs & Simpson Partnership, Portland. Sampsel's firm sells, leases and manages commercial real estate.

Does this restrictive situation encourage acquisition? "Yes, acquisition is easier and there will be a lot more of it, particularly of worn-out structures sitting on great real estate, which can then be rehabilitated and repositioned or demolished," Fitkin says.

Nothing was worn out - but there was some repositioning - when Cincinnati-based The Kroger Co. last year acquired Albertson's, Frank Meyer Inc. grocery/housewares stores and Quality Food Centers (QFC), all sister companies in the Pacific Northwest region.

Then there is MBK Northwest Ltd., a developer, buyer and seller of retail properties that is active in both states.

MBK recently redeveloped the 750,000 sq. ft. Jantzen Beach Super Center and acquired 45 acres of the120-acre Cascade Station mixed-use project, also in Portland. The company plans to build an 18-screen cinema and 380,000 sq. ft. of retail and restaurant space on the site.

Sales up by 25% a sq. ft. MBK is also in the home stretch of redeveloping the 700,000 sq. ft. Parkway Super Center in Seattle, with Pier One Imports, Old Navy, The Home Depot, Barnes & Noble, and Staples among its tenants.

MBK president Mason Frank says that earlier phases have led to sales increases of as much as 25% per sq. ft. for older tenants. Meanwhile, he says, newer tenants are doing better than expected, with the nine restaurants racking up a whopping $350 to $800 per sq. ft. For its next act, MBK is acquiring the 1.2 million sq. ft. Lakewood shopping center in Tacoma, Wash., and will replace it with power, convenience store, entertainment and civic center components.

By all accounts, downtown Seattle is coming back as a shopping destination after a bit of a decline.

"Older retail centers are being repositioned with food and hardware stores and good restaurants are opening up," notes Wyatt Starosta, research manager in Marcus & Millichap's Seattle office.

Starosta predicts that combined taxable retail sales in both states will continue its upward trend (from about $47 billion in 1998 to $51 billion last year). That figure is expected to hit $54 billion this year.

Portland/Oregon CB Richard Ellis' Dunn attributes Oregon's and Portland's economic resiliency to the transition from dependency on wood products to wide economic diversification in the past 20 years. Case in point: Intel Corp., the semiconductor chip-making giant and Portland's largest employer.

Dunn says Portland's average household income last year was $62,290 (the median income was $48,000). Portland is also popular with shoppers from Vancouver, British Columbia, because there is no state sales tax in Oregon.

A rising tide A rising tide is supposed to raise all boats, and this economic tide has done just that, except for a few boats that have sunk in Seattle, such as Pacific Linen, Jay Jacobs, Garden Botanika and Loehmans apparel department stores.

The Future Shop electronics chain, which strayed from its base in Vancouver, also bit the dust in both states. MBK Northwest's Frank says failures among larger retailers coming into those two markets tend to be symptomatic of larger internal problems that plague their stores, even in thriving Pacific Northwest markets. Those departed stores have been replaced with such new retailers in Portland as Circuit City, Best Buy, Linens 'N Things, and Bed, Bath & Beyond, all of which typically occupy 40,000 sq. ft. spaces.

In Portland and Seattle, drug and grocery chains are often at each others' throats in the big stakes competition for sites and strategic position in shopping centers.

"Grocery chains like Safeway and Fred Meyer have gone to one-stop shopping that includes pharmacies, up against the Walgreens, Longs Drugs and Save On Drug stores," says Dunn. "And they're all looking for the same sites."

Nevertheless, Oregon is considered to be under-retailed, Dunn says. The Portland metropolitan area, for example, has about 17 sq. ft. per person of retail space - about half the typical urban ratio. That figure likely will grow. According to Dunn, more concepts have been announced for Portland's downtown and suburbs in the last few months than for the past few years.